Private Order Flows and Builder Bidding Dynamics: The Road to Monopoly in Ethereum's Block Building Market

TL;DR

This paper investigates how private order flows influence builder bidding and profit distribution in Ethereum's PBS system, revealing a trend toward monopolistic market dominance driven by private information and profit extraction.

Contribution

It introduces an asymmetry auction model for MEV-Boost and provides empirical evidence of private order flows' impact on market centralization in Ethereum.

Findings

Private order flows account for 54.59% of block value.

Builders with more private flows tend to win and retain larger profits.

Current PBS system favors monopolistic builders over equitable profit sharing.

Abstract

Ethereum, as a representative of Web3, adopts a novel framework called Proposer Builder Separation (PBS) to prevent the centralization of block profits in the hands of institutional Ethereum stakers. Introducing builders to generate blocks based on public transactions, PBS aims to ensure that block profits are distributed among all stakers. Through the auction among builders, only one will win the block in each slot. Ideally, the equilibrium strategy of builders under public information would lead them to bid all block profits. However, builders are now capable of extracting profits from private order flows. In this paper, we explore the effect of PBS with private order flows. Specifically, we propose the asymmetry auction model of MEV-Boost auction. Moreover, we conduct empirical study on Ethereum blocks from January 2023 to May 2024. Our analysis indicates that private order flows contribute to 54.59% of the block value, indicating that different builders will build blocks with different valuations. Interestingly, we find that builders with more private order flows (i.e., higher block valuations) are more likely to win the block, while retain larger proportion of profits. In return, such builders will further attract more private order flows, resulting in a monopolistic market gradually. Our findings reveal that PBS in current stage is unable to balance the profit distribution, which just transits the centralization of block profits from institutional stakers to the monopolistic builder.